TORONTO (Reuters) - The Canadian dollar ended slightly stronger against its U.S. counterpart on Monday as markets struggled to deal with fresh turmoil in Europe as fears heightened that Italy would be the next victim of the euro-zone debt crisis.
North American stock markets eked out small gains in choppy trade while the euro fell against the U.S. dollar as Italian bond yields soared, stoking fears that the government of euro-zone's third-largest economy could be facing default, just as Greece has in recent months.
The Canadian dollar held in a relatively tight range after volatility last week, and traders said the market appeared to be waiting for clearer direction from Europe.
I think we're just in fatigue mode, to be honest, because we've moved back and forth and responded to rumor, rumor, rumor, said David Tulk, chief Canada macro strategist at TD Securities.
Maybe the market is biding its time until there is greater clarity. This thing could explode overnight but for the time being, I think there hasn't been enough one way or another to compel us to move in a dramatic fashion.
The Canadian dollar ended the North American session at C$1.0127 versus the greenback, or 98.75 U.S. cents, above Friday's North American session close of C$1.0167 to the U.S. dollar, or 98.36 U.S. cents.
Volatility has risen and market direction has hinged on European headlines for weeks. While Greece has taken all the attention recently as it looked to be teetering toward default on its short-term debt, focus on Monday shifted to the swelling Italian deficit.
Italian Prime Minister Silvio Berlusconi defied heavy pressure to step down as he faced a rebellion in his own party. An upward move in Italian stocks and a pullback in government bond yields reversed when he denied reports that he would resign within hours.
What happens in Europe really completely sets the tone for the market risk environment that exists globally, said Jack Spitz, managing director of foreign exchange at National Bank Financial.
Gold futures rose 1.6 percent as investors piled into the traditional safe-haven asset.
Whether it's Greece and the ongoing shenanigans with respect to (former President George) Papandreou ... or whether it's now Italy and the issues facing Berlusconi, it's all about structural financial reform in Europe, and how tough it is to enact legislation and find stable enough governments to get it going, Spitz said.
He said there was U.S. dollar support near the 20-day moving average at C$1.0123, and the 50-day moving average at C$1.0103. He noted U.S. dollar resistance around C$1.0210-C$1.0230, where there was a congestion of offers for most of last week.
U.S. Treasuries rose on Monday with benchmark 10-year note yields dipping back below 2 percent as fears over rising risks in Italy sent investors scrambling for the safety of U.S. government debt.
Canadian government bond prices were mixed. The two-year bond fell 5 Canadian cents to yield 0.953 percent, while the 10-year bond climbed 6 Canadian cents to yield 2.156 percent.
(Additional reporting by Claire Sibonney and Jennifer Kwan; editing by Peter Galloway)